Private Sector againist re-introducuction of foreign exchange controls in Zambia
THE BANK OF ZAMBIA (AMENDMENT) BILL, 2013 PRESENTATION BY THE PRIVATE SECTOR ASSOCIATIONS TO THE PARLIAMENTARY COMMITTEE ON ECONOMIC AFFAIRS, ENERGY AND LABOUR: CONSIDERATION OF THE BANK OF ZAMBIA (AMENDMENT) BILL, N.A.B NO. 1 OF 2013
Prepared by Private Sector
28 February 2013
The Private Sector (in particular Zambia Association of Manufacturers (ZAM), Chamber of Mines of Zambia (CMZ), Zambia National Farmers Union (ZNFU), Zambia Chambers of Small and Medium Business Associations (ZCSMBA) and Tourism Council of Zambia (TCZ)) is most grateful to be among the witnesses called before this Select Committee on Economic Affairs, Energy and Labour of the National Assembly to discuss the proposed Bank of Zambia (Amendment) Bill No. 1 of 2013 that seeks to effectively re-introduce foreign exchange controls in Zambia. The Consortium of the Private sector Associations represented before this committee represents the key Economic Sectors in Zambia which in their individual rights are big players in the economy. We take cognizance of the importance of this exercise and the implications that the proposed measure have on businesses in Zambia.
We appreciate the objective of the Bill in terms of monitoring of balance of payments which is very important for any given economy. Zambia will not be the first country to implement some of the suggested activities and in any case most of the proposed insertions are already being done in the current system. We also understand Government’s frustration in reducing interest rates and therefore resolving as the last possible tool to prescribe interest and other charges that Financial Service providers may impose on transactions.
However, fundamental questions here include: What is the rationale for this measure? Will it lead to increased aggregate output? Can the intended goals be achieved only through legislation and no other options? What gaps are there in existing monetary policy regulations and the powers of the Central Bank to warrant additional legislative regulations? Are the powers of the Governor of the Bank of Zambia not going to be too excessive to the extent of stifling private investments? How much research was done by the Bank of Zambia to estimate the impacts on the various sectors of the economy?
The Government has discretion to introduce regulatory measures that aim to save certain purposes. However, this should be done following broad consultations with all relevant stakeholders right from conception of ideas to avoid suspicion and possible pitfalls in the intended regulations or indeed to avoid prescribing regulation when in fact the solutions may lie in other measures. Even when a case for regulation has been duly established, it should not be done at the expense of both short and long-term investment flows. In addition, short-term cyclical fluctuations in the foreign exchange or any other markets, must not be the reason to take permanent legislative measures that will have long-term negative consequences on the economy. Furthermore, misbehavior of few companies should not justify enacting legislation that will affect investment flows and, therefore long-term viability of the economy.
2.0 Private Sector Submission
Notwithstanding our appreciation of the intentions of the bill, Private sector would like to advise that the key ingredient in any economy is confidence. In its current form, the Bill could easily be interpreted to be suggesting Exchange controls. This could result in anxiety and less of confidence by stakeholders, which may even defeat the otherwise noble objective of the amendment.
Insertion of 40A according to the proposed amendment, The Bank may, to promote the efficient operation of the foreign exchange system, regulate and monitor –
(a) foreign exchange inflow and outflows and amount remitted;
(b) imports and exports of goods and other inflows and outflows;
(c) international transaction in services;
(d) international transfers to or from non-residents;
(e) profits or dividends received in respect of investments abroad;
(f) borrowing and trade credits from non-residents abroad;
(g) investments in the form of equity and debt securities abroad;
(h) receipts of both principal and interest on loans to non-resident; and
(i) internal money transfer into and out of the country.
Whereas the measures proposed in 40A appear to be strengthening the monitoring and improving the management of balance of payments, the word REGULATE in the preamble may send a misleading connotation more so that most companies already submit this information to the Central Bank.
1. The word “Regulate” conjure up fears of possibility of remittances or receipts of foreign exchange being delayed, denied or interfered with;
2. Duplication of efforts and delays in exporting or importing of goods given that Zambia Revenue Authority adequately undertakes this function;
3. Delays, denials or limiting of payments for services contracted from outside Zambia;
4. Interference in the pricing of financial services and contracts
5. Increased bureaucracy from possible additional scrutiny of intercompany transactions; and
6. Possible build-up of a “pipeline” of foreign exchange transactions as payments and remittances get scrutinized.
Insertion of 44A: The Bank may, in support of price and financial stability, prescribe the maximum rate of interest and other charges that financial service providers may impose on a banking transaction.
It is desirable that interest rates that have remained stubbornly high are brought down to ease the cost of finance and foster private sector growth and development. Whereas all other macroeconomic indicators have significantly improved, interest has remained static and unfriendly to the business sector. Notwithstanding the above, the route of prescribing the maximum interest rate will erode the fundamental principal of market related pricing of money. Private sector is against price controls in any form including in the money market. We believe that the Central Bank should engage in interventions that will influence the downward trend of interest rates without directly prescribing the prevailing interest rates. In our view, influencing the level of interest using the policy rate which the Central Bank initiated was a step in the right direction as opposed to prescribing the maximum interest rates.
Furthermore, it should be noted that one of the reasons the interest rates have remained high is the lack of depth in the financial system that has failed to support investment financing. For the long term therefore, government should devote more effort to developing the financial sector as articulated in the Financial Sector Development Plan (FSDP) as opposed to regulation. In addition government should continue limiting its domestic borrowing in order to avoid crowding out the private sector.
Moreover, fixing of interest rates may have adverse effects on the very sectors that we intend to promote such as agriculture. This is so because agriculture has historically been regarded as a high risk sector by banks and attracts high interest rates. Therefore this may only motivate banks to shift resources available for lending to less risky sectors such as trading and construction.
3.0 CONCLUSION AND WAY FORWARD
Over regulation imposes higher costs on economic units and increases uncertainty and risk. It generally has a negative impact on sustained private sector growth and is likely to work contrary towards government objectives of employment creation and poverty reduction. In this regard, additional regulation requires extensive consultations and assessment of its necessity given other courses of action available before government.
In this regard, we propose that the Bill be withdrawn from Parliament to allow for extensive consultations. The consultations should include undertaking of an in-depth analysis of the options available to government to strengthen the monitoring of Balance of Payments and reducing the high interest rates currently obtaining in Zambia. In addition, the consultations should clearly prove the necessity of regulation and the expected impact of proposed measures on business and the general citizenry.